Kieran Hines, Senior Analyst in the Celent’s Banking practice, offers his insights on Money20/20 Europe and what is happening around the open ecosystem.
With the dust now settled on Money 20/20 Europe, I wanted to share my reflections on the event.
Firstly, the personal. I’m far from the first person to comment on how brilliant it was to get back to a major event after two years of virtual conferences, but I don’t think I’ve ever used the phrase “It’s great to finally meet you in person!” so many times.
With so many people to catch up with, I had a full meeting schedule and spent most of my three days in Amsterdam dashing across the expo hall between appointments. I want to thank everyone I met for their time and insights. Virtual meetings are good, but there’s no substitute for speaking face-to-face.
My conversations at the event focused largely on what is happening around the open ecosystem (Open Banking, BaaS, and embedded finance). In short, there is a lot going on. Back in 2020, bank-led innovation around Open Banking was much closer to being a concept than a reality. In the intervening time, an extraordinary amount has changed. While Open Banking is still in its early stages, it is now delivering material (and commercial) benefits to a growing number of banks.
Everyone at Money 20/20 will have their own takeaways from the event depending on who they met there. Based on the discussions I had, there are three big themes to share.
While a lot of the early conversations about Open Banking focused on the use cases for transaction data (and there are many), Open Banking payments (OBP) are now one of the hottest topics in the industry and were a big theme at Money 20/20 Europe.
What do we mean by Open Banking payments? As an ‘on-ramp’ to the existing account-to-account payment rails, the payment initiation APIs available under Open Banking in Europe enable a real time credit transfer to be built into either a new or pre-existing customer journey. Examples include bill payments, invoice processes, funding digital wallet accounts, or offering OBP as a ‘pay by bank’ option in the checkout page of a digital merchant. Some of the leading providers in this space at the event included Token, Plaid, Yapily, Tink/Visa, Truelayer, and Mastercard.
This is a rapidly developing area of the payments industry and, while overall volumes remain low, they are growing rapidly. This is particularly true in markets such as the UK, France, Germany, and the Nordics, where Open Banking APIs are reaching high levels of quality and availability. This space is still very much nascent but will continue to grow strongly in 2022 and 2023 as the ecosystem of merchants accepting OBP and customer familiarity with the experience builds.
One of the most interesting shifts in this space has been the growing focus on OBP in digital commerce. In our 2021 report Now is the Time for Open Banking Payments, we highlighted this as a considerable long-term opportunity for the industry—but one that will be slow to build given the strong alternatives in the market for digital commerce payments. It will take time for customer adoption to start to scale in these areas; however, it’s notable that each of the providers offering services around OBP is focusing on building partnerships with PSPs and merchant acquirers.
As with other areas of Open Banking, OBP will become an increasingly important customer touchpoint for banks. Making sure that the user journey is smooth when the customer interacts with their account provider will become a ‘moment of truth’ issue for customers and should be prioritised. The most innovative banks are already looking to embed OBP into their own workflows and offerings to variously improve the efficiency of their operations and the user experience.
Looking more broadly at the providers offering infrastructure services to fintechs and challenger institutions, it’s clear that there has been a shift in go-to-market strategy. The previous emphasis on offering capabilities as the ‘building blocks’ for innovation is starting to give way to a focus on tightly packaged solution sets aimed at high-value workflows or business areas. Productising enhancements to services such as payroll, accounting, and for those in the property business were all examples that were discussed at the event. While in part this may reflect the need to drive revenue growth in today’s market, it also highlights the growing maturity of this part of the ecosystem.
This approach is not unique to the providers of infrastructure services to fintechs either. A large transaction bank I met with was open about its own shift in thinking. Where once it saw its business as offering a suite of banking products to clients, it was now focused additionally on creating new sources of value by delivering the services that its customers need to best serve their customers. While a small step linguistically, it’s a big leap in terms of the business model and related technology strategy. Open Banking and smarter use of transaction data have become core to its mission.
These examples highlight the shift that the industry is undergoing in its thinking around embedded finance. Where once this was seen through the narrow lens of product distribution, the debate now is a far more nuanced one around where and how providing access to data and services in existing workflows can unlock new value for customers. This is driving new thinking and understanding about very specific customer pain points and the way that financial institutions can address these through intelligent embedded finance plays.
Many a time I've heard friends and family remark that they should have been a plumber when they’ve just been given an invoice for work on their home heating or water systems. While this would not be a sensible career move for someone as untalented in practical matters as I am, it perfectly demonstrates the value in providing (and maintaining) essential infrastructure.
This is equally true in today’s fintech ecosystem. In the same way that everyone wanted to be the customer interface back in the early days of fintech, now the focus is on being the infrastructure that enables others to innovate. While far less sexy than being a prominent B2C brand, doing the legwork for those innovators is now a lucrative space in which to operate. Plaid, Token, Yapily, Tink/Visa, Modulr, and Railsr are all important players in this segment of the market, seeking to build best-of-breed solutions in their niches to thrive.
With the benefit of hindsight, this was always likely to happen. As a B2C market entrant, it’s incredibly difficult to build a customer base that can deliver the revenue to be self-sustaining. Several of the biggest fintech unicorns have yet to break even for example, and the number of challenger banks reaching this point is even smaller. Providing the enabling infrastructure for these businesses to succeed is therefore a far more sensible place to operate.
The growth in interest in embedded finance and Open Banking-enabled innovation will drive further success for the infrastructure players that get their offerings right. Enabling established banks to better compete in these areas will become increasingly lucrative over time, as product and service innovation will increasingly be centred on how to leverage these concepts to deliver new value to customers.
Kieran is a Senior Analyst in the Celent’s Banking practice. His research focuses on the impact of technology-driven change in both the retail and corporate banking sectors, with an emphasis on the role that open banking, embedded finance, data and analytics, and cloud technologies have in transforming customer propositions and the long-term value chain in banking. An experienced analyst with close to 20 years in the industry, Kieran works closely with banks, vendors and payment processors on their technology and business strategies.
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